The duration of patent rights in Great Britain was extended from 14 to 16 years in 1919 (see 9, and 9 and 10, Geo. V, c. 80, Chitty, Annual Statutes 1919, p. 423). No corresponding change seems to have been made with respect to trade-marks. Important patent legislation is now pending in France which will radically change the existing law if passed.

The only actual change in duration of patents and trade-marks since 1909 in the countries named seems to have been in Great Britain, as indicated above. (O. D. 721. 45-20-1293.)

When a patent becomes obsolete before the expiration of its term, it is sometimes possible to deduct that portion of its cost not charged off in preceding years in the taxable year in which it became obsolete. This is a very difficult matter to prove, however, and the author knows of no instance in which an allowance for obsolescence of a patent or copyright has been allowed.

"If the patent becomes obsolete prior to its expiration, such proportion of the amount on which its depreciation may be based as the number of years of its remaining life bears to the whole number of years intervening between the date when it was acquired and the date when it legally expires may be deducted, if permission so to do is specifically secured from the Commissioner. Owing to the difficulty of allocating to a particular year the obsolescence of a patent, such permission will be granted only if affirmative and satisfactory evidence that the obsolescence occurred in the year for which the return is made is submitted to the Commissioner." (Art. 167, Reg. 45, Rev.)

"Amounts representing losses on account of obsolescence of physical property may be included as a deduction from Gross Income as a loss, provided such amounts have been recorded in the books following the condemnation and withdrawal from use of the obsolete property. The amount of obsolescence that may be claimed as a deduction shall be ascertained by deducting from the cost of the property the total amount that has been previously claimed and deducted as depreciation, plus residual value at time of obsolescence or plus the amount received from the sale of the property. The obsolescence deduction must not include the accumulated depreciation applicable to prior years." (Art 178, Reg. 33, Rev.)

“Obsolescence is not ordinarily applicable in the case of intangibles, but will be allowed in exceptional cases, as in the case of the discontinuance of a going business because of the exhaustion of its source of supply, where the cost of the good will, or its value as of March 1, 1913, if acquired prior to that date, can be definitely shown and the period of its obsolescence determined with reasonable accuracy." (0. D. 472. 17-20-884.) "An inventor of a war device, which undoubtedly had a large value on January 1, 1918, when the war was on in full force, cannot now claim a deduction for depreciation and obsolescence based on the value of the intangible property as of that date and on Dec. 31, 1918, after the signing of the armistice, when it was claimed it had a very small value." (T. B. M. 39. 7-19-291.)

The advent of national prohibition, however, has wrought such changes in the values of many trade-marks and trade names owned by former dealers in liquors as to occasion actual obsolescence of

many of such trade-marks and trade names. The Internal Revenue Bureau rulings on their deductions for obsolescence are instructive for purposes of guidance in the future.

"(1) Distillers and dealers in liquors are entitled to make a deduction (based on actual cost or fair market value as at March 1, 1913) from Gross Income, on account of depreciation or obsolescence of their intangibles, such as good will, trade-marks, trade-brands, etc., such deductions being limited to assignable assets, the value of which has been destroyed by prohibition legislation; and

(2) In arriving at the taxable income for the first taxable year ending on or after January 31, 1918, the obsolescence fully accrued on that date is to be allowed as a deduction in computing the income subject to taxation under the Revenue Act of 1918, plus a further deduction of such proportion of the remaining value of the intangible assets as the interval between January 31, 1918, and the end of the taxable year bears to the total interval between January 31, 1918, and January 16, 1920 (unless at an earlier date the taxpayer discontinues his business); and

(3) For any taxable year following the taxable year just referred to, a deduction in respect of the value of such intangible assets on January 31, 1918, based upon a ratable distribution, will be permissible." (T. B. R. 44. 15-19-445.)

"Deductions from Gross Income on account of depreciation or obsolescence of intangibles, such as good will, trade-marks and trade-brands, allowed distillers and dealers in liquors, are also applicable to brewers." (O. D. 298. 24-19-565.)

"A corporation engaged in the wholesale and retail liquor business began to liquidate its business in 1917 on account of the passage of prohibition legislation in several States in which it had built up considerable trade. By the close of 1917 it had disposed of a large part of its tangible assets and had reduced its Capital Stock accordingly. It was unable, however, to sell its intangible assets, such as trade-marks, tradebrands, etc., for which it had paid x dollars par value of its stock, and it claimed this x dollars as a loss for 1917.

"The Committee has reached the conclusion that since the corporation had a considerable volume of sales in 1918, the item of x dollars claimed as a loss on account of good will cannot be allowed, because such a loss was not sustained in 1917. Although it may be conceded that the good will had shrunk in value on December 31, 1917, it evidently had some value in 1918, as shown by the volume of sales made by the corporation in that year." (A. R. R. 185. 29-20-1076.)

"You are advised that a reasonable allowance for obsolescence of such assets as good will, trade-marks and trade-brands may be taken by distillers and dealers in liquors against earnings between November 21, 1918, the date upon which the Agricultural Appropriation Act, providing for wartime prohibition was enacted, and July 1, 1919, the date upon which the wartime prohibition is to become effective. To sustain a claim for a deduction for obsolescence in respect of good will, trade-marks or tradebrands, the taxpayer must show that the value of the property in question has been destroyed or will be destroyed not later than June 30, 1919, and that the taxpayer is not continuing in any similar trade or business." (Letter from Commissioner Roper to Mr. Levi Cooke, dated June 21, 1919.)

Chapter XI.

VALUATION OF PATENTS, COPYRIGHTS, ETC.

The question of properly determining the value of a patent or group of patents, or of a copyright or trade-mark, has long vexed the minds of many owners and their attorneys. The intangible quality of the subject matter, and the limited duration of protection afforded, make their value so problematical and speculative that very seldom can parties with opposite views, as owner and prospective purchaser, unite on a given figure as the real worth. Inventors and owners have long held to the doctrine that a patent is worth "as much as they can obtain for it," and most values have heretofore been set as a compromise between the asking price and the price the purchaser thinks he should pay for the patent. Then, often it happened that a patent purchased at one figure was placed on the books of a newly formed company at quite a different figure, almost always a larger one than was paid to the inventor. Again, the valuation of a patent or series of patents obtained by an established company after long experimentation and development in its own research departments must be reached by different standards than what they would bring in the open market.

These several conflicting methods of valuing patents, copyrights, etc., were considered too speculative, in the opinion of the tax lawmakers, to show an accurate value for entry on the books of the owner as Invested Capital or for purposes of depreciation return. The Internal Revenue Bureau has accordingly laid down several rules as governing (for tax purposes) the values of patents, copyrights, and the like, to the then owners. These rules at first glance appear too harsh and rigid, and are generally condemned by most inventors with whom the writer has discussed the matter, but analysis will show that the Internal Revenue Officials have clarified a difficult situation and gained their point in requiring patent owners to carry their patents on their books at cost price, the same as machinery or raw material are entered at cost price. The old practice of having one company enter a valuable patent on their books at a nominal price of One Dollar and another company in the same city enter a patent, the value of which was problematical, at One Hundred Thousand Dollars, had to be rectified, at least to the extent of having all companies use the same system in determining the values entered on their tax return. The action of the Treasury Department will not appear

so harsh if it be kept in mind that the Internal Revenue Bureau is not interested so much in the value of a patent for purpose of its sale or purchase as in the figure at which such patent is entered on the books of the owner as part of the Capital Invested and for purposes of depreciation.

The Income Tax Acts are clear in their intent to have the value carried on the books represent the actual cost of the patent to the owner in all cases, except where the patent was owned by him prior to March 1, 1913, when the fair market value on March 1, 1913, may be substituted in that year and such appraised value used as a basis of depreciation during the remaining years of the life of the patent. To assure this result, the Internal Revenue Bureau has formulated the following rules governing, for tax purposes, the valuing of patents by the then owner:

A. For patents, etc., acquired before March 1, 1913, the fair market value on that date may be determined and entered on the books for purposes of depreciation and to be used in lieu of the cost value for determining profit or loss in case the patent is subsequently sold.

B. For patents, etc., acquired after March 1, 1913, the cost thereof shall be entered on the books for purposes of determining Capital Invested, annual depreciation charges, and profit or loss in case of subsequent sale of the patent. This rule is further divided into :

b (1) For patents, etc., acquired from the Government, the cost thereof shall be the various Government fees, cost of drawings, experimental models, attorneys' fees, etc., actually paid.

b (2) For patents, etc., purchased, the cost thereof shall be the purchase price actually paid; if the purchase price be in stocks, bonds, or like securities, the cost price is the fair market value of such stock or other securities at the time of the purchase.

These rules are based upon the following Departmental rulings: SEC. 202. (a) That for the purposes of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal or mixed, the basis shall be:

(1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date; and

(2) In the case of property acquired on or after that date, the cost thereof."

"A taxpayer disposing of patents or copyrights by sale shall determine the profit or loss arising therefrom by computing the difference between the selling price and the value as of March 1, 1913, if acquired prior to that date, or between the selling price and the cost, if acquired subsequent to that date." (Art. 40, Reg. 45, Rev.)

"In computing the depreciation allowance in the case of a patent or copyright, the capital sum to be replaced is the cost (not already deducted as current expense) of the patent or copyright or its fair market value as of March 1, 1913, if acquired prior thereto. The allowance should be

computed by an apportionment of the cost of the patent or copyright or of its fair market value as of March 1, 1913. * * * If the patent or copyright was acquired from the Government, its cost consists of the various Government fees, costs of drawings, experimental models, attorneys' fees, etc., actually paid. If a corporation purchased a patent and paid for it in stock or securities, its cost is the fair market value of the stock or securities at the time of the purchase." (Art. 167, Reg. 45, Rev.) These rules render it fairly simple to enter on the books the cost value of the majority of patents. Whenever one is purchased, the figure to be used is specified, and whenever the patent is obtained by the inventor from the Government, the cost thereof can be quite easily computed. When the purchase price includes stocks, bonds, and other securities, the Internal Revenue Bureau admits the difficulty of ascertaining the exact value at the particular time of the sale, and admits that the problem cannot be solved by any one method. They allow the taxpayer to apply the method that best represents the actual value under the existing circumstances. The Bureau does, however, suggest the factors to be considered.

"The value of shares of stock as of March 1, 1913 (or any other date) should be determined on the basis of market quotations as at that date, instead of book values." (A. R. R. 33. 9-20-764.)

"The appraised value of stock, as at the time of the creation of a trust estate, by appraisal of a State court, creates a presumption only that the stock is of the appraised value; this presumption may be rebutted by competent evidence to the effect that the stock was of another value than that appraised." (A. R. M. 7. 30-19-637.)

"The 'fair market value' of property is the sale value of property in money as between one who wishes to purchase and one who wishes to sell, and is the price at which a seller willing to sell at a fair price and a buyer willing to buy at a fair price, both having reasonable knowledge of the facts, will trade. It implies the existence of a public of possible buyers at a fair price, and recognizes that property has no 'fair market value' when market conditions are such that there would be no trading in the property in question at a fair price." (T. B. R. 57. 19-19-494.)

"The value of stock which has no market price may be estimated by resort to the value of the assets capitalized and attendant circumstances which may affect the value of such assets. (Goodwin vs. Wilbur, 104 Ill. App. 45; Collins vs. Denny, 89 N. W. 1012; Virginia vs. West Virginia, 238 U. S. 202.) In the case of inventions, their value is dependent upon proven utility or the likelihood of practical usefulness, and therefore stock issued thereon will have a corresponding value. If an inventor should sell a recently patented invention to a manufacturer before its use has been tested, but simply upon its apparent usefulness, it may be said that the invention at that time is worth what is paid for it because a price has been offered and paid. The measure of value is the price paid. Stock issued upon such invention would be worth the value of the invention measured by the price which the manufacturer has paid for it.